Covid-19 has caused many businesses a great deal of financial difficulty. Where a loss has been made, there are a variety of options available to ease the pressure with some financial relief.
Ensuring you are making the best use of a loss can bring some much needed cash into the business.
A temporary legislation change has been introduced to assist loss-making businesses.
The temporary change increases the period for which a business can carry back a loss from one year to three years.
The extended carry back is available to both unincorporated businesses and Limited Companies.
This can be used to generate a useful tax repayment when cash flow is tight.
Currently, a person who incurs a trading loss in a tax year can claim to offset the loss of their net income of the previous year, or the current year, or both. Traders using the cash basis are also eligible.
During this limited period, for the previous three years, a business can carry back losses and set against trading profits. Losses carried back must be set against income of a later year before an earlier year. This temporary change applies to losses in 2020/21 and 2021/22. It will allow a loss for 2021/22 to be carried back to 2020/21, where the individual had no other income and a loss was also made within the year.
Darren is a Plumber. He prepares accounts to 31 March each year. For the year to 31 March 2021, he made a loss of £12,000. It is assumed that he made a loss of £5,000 for the year to 31 March 2022.
He had trading profits of £27,000 in 2019/20, £20,000 in 2018/19 and £16,000 in 2017/18.
He carries the loss of £12,000 back to 2019/20 reducing his profits to £15,000 for that year and generating a tax repayment of £2,400, ie £12,000 @ 20%.
In the absence of the extended carry back, if he had no other income (or gains) for 2021/22 and no income for 2020/21, Darren would have to carry the loss from 2021/22 forward to set against other profits from the same trade.
However, the extended carry-back allows him to carry the loss back to set against trading profits from 2019/20.
Although this will reduce his profits to below the personal allowance for that year of £12,500, it will generate a tax repayment of £500, ie £2,500 @ 20%.
As the loss cannot be tailored to preserve the personal allowance, if he does not want to waste any of his personal allowance for 2019/20, he can instead carry the 2021/22 loss forward.
The extended carry-back scheme also applies for Corporation Tax purposes for any losses incurred in accounting periods ending between 1 April 2020 to 31 March 2021, and 1 April 2021 to 31 March 2022.
Usually, losses can be carried back to the previous accounting period. With the extended carry-back, a loss can be carried back and set against the trading profits of the previous 3 years. The same rule applies, losses must be set against a later year before an earlier year.
ABC Plumbing Supplies Ltd makes a loss of £40,000 for the year to 31 January 2021 and a loss of £25,000 for the year to 31 January 2022. The company made a profit of £30,000 for the year to 31 January 2020, a profit of £50,000 for the year to 31 January 2019 and a profit of £42,000 for the year to 31 January 2018.
The loss for the year to 31 January 2021 is carried back and set against the profit of £30,000 for the year to 31 January 2020, with the remaining £10,000 set against the profit of £50,000 for the year to 31 January 2019, reducing it to £40,000. This generates a corporation tax repayment of £7,600, ie £40,000 @ 19%.
The loss of £25,000 for the year to 31 January 2022 is carried back and set against the remaining profits for the year to 31 January 2019, reducing them to £15,000. This generates a tax repayment of £4,500, ie £25,000 @19%.
With the absence of the extended carry back, ABC Plumbing Supplies Ltd would have only been eligible to carry back £30,000 of the loss for the year 31 January 2021. This would have reduced the payment to £5,700. With the extended carry back, this payment increases the total repayment by £6,900.
We understand it’s been a tough 12 months. That’s why making sure you have the best advice is important.
Remember that there are three main options:
- Make a current Year Claim to reduce your tax bill
- Carry Back your losses to receive a Tax Refund
- Carry Forward your losses to reduce your future tax bill
For businesses with large losses, a combination of all three should be considered.
Therefore, please do speak to a good accountant to make sure you put any losses to the best use for your business.
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